Regulating managing general agents in Canada

Managing General Agents (MGAs) may soon be required to licence and submit to the same high standards of regulatory oversight in Canada as do other distributors of insurance products.

The distribution of insurance products in Canada is considered to be a market conduct issue and, therefore, is regulated by provincial or territorial authorities. Historically, the independent broker channel and captive agents were the favoured modes of distribution of insurance products in Canada. However, in recent decades, we have seen a significant rise in the direct distribution method. All of these distribution options fit, generally, the legislative model: a company or underwriter is statutorily responsible for ensuring the integrity of product and solvency of operations while the distributor must comply with a separate but related set of duties to properly inform the client and abide by specified business and ethical standards.

During the last 10 years or so, the MGA distribution model has grown market share significantly. This method of distribution is heavily favoured by much of the London insurance market when placing products in Canada. This preference has developed for many reasons; foremost among them the fact that the MGA may work with a UK-based underwriter to develop the local market without requiring a significant investment in operations or a ‘bricks and mortar’ presence in Canada.

Canadais considered to be an effectively – which, to some, means heavily – regulated jurisdiction. The downside, of course, is that such a perception may discourage investment. The upside is reflected in the strong performance and stability of the Canadian financial services markets overall, in sharp contrast to the volatile experience of many western countries in recent years.

The growing presence and market strength of MGAs has attracted regulatory attention, in large part because – unlike brokers and agents – they are not regulated in many Canadian jurisdictions. Of course, this situation is not well-received by the more conventional and established distributors – brokers, agents and directs – which must comply with quite rigorous statutory and other standards. There is a cost associated with the administration and oversight required to ensure robust compliance standards which an MGA does not incur.

With respect to any suggestion of ‘market advantage’ MGAs might have, it is important to note that for the past seven years they have been regulated in some of the western provinces. In other jurisdictions, many MGAs have voluntarily submitted to licensing and regulatory requirements. The primary reason for doing so is that this is seen by some MGAs as presenting a competitive opportunity; they can market themselves as being voluntarily compliant and neutralise any potential criticism of their practices that may, otherwise, be perceived to have merit.

Provincial and territorial regulators have been paying attention to these developments.

In 1989, in an effort to work towards harmonised provincial and territorial regulatory standards for the insurance industry in Canada, regulators from all jurisdictions formed the Canadian Council of Insurance Regulators (CCIR). The CCIR has established numerous committees and meets regularly to prioritise and discuss implementation of various initiatives. For the last several years, CCIR has articulated the regulation of MGAs, presumably in all jurisdictions, as being a high priority.

A regulatory concern is that as MGAs come to represent a greater portion of the marketplace, there is an increasing likelihood that a serious market issue may well arise. (This concern is not intended to stand as a comment on the conduct of MGAs but merely as a reflection of the obvious: that an unregulated market that is engaged with the distribution of all manner of insurance products will, at some point, invite scrutiny.) Regulators do not want a situation to overtake them; where they must react to misconduct to regulate an unregulated financial services distribution function.

Fortunately, for the MGAs, the CCIR tends to take time in implementing significant measures. However, it is likely that within the next five years, all, or the vast majority of Canadian jurisdictions will have legislation requiring licensing and regulation of MGAs operating in the country. As the London market is very dependent on this distribution model, it is well-advised to consider this possible outcome in business planning for the shorter and longer terms.

Vivian N. Bercovici is a partner at Dickinson Wright. She can be contacted on +1 (416) 777 4044 or by email: vbercovici@dickinsonwright.com.